Why the SEC keeps Backpedaling

Jesse Westbrook of BusinessWeek has a great analysis of what’s going on – or not going on – at the SEC. After the Bernie Madoff debacle, Mary Schapiro, chair of the SEC was ready to crack down and show the backbone of the SEC. This was in contrast to the easier years of the SEC under former chair Christopher Cox. And I’m sure we all wanted to see Mary jump on her horse, ride off after the bad guys, and come back with a whiff of smoke rising from her six-shooters. At the time she said “Investors are looking to the SEC to assure the safekeeping of their assets. We cannot let them down” But this has not happened yet.

At first, Schapiro proposed inspecting almost 10,000 money managers. Somehow this number was reduced to 1,600 in December. Not surprisingly, this change in project scope came after Schapiro met with many executives of fund companies.

BW reports that there were several proposals which sounded great at first, that were then scaled back or delayed . Hedge funds lobbied, and short-selling rules were delayed. Corporate Beard rules were also delayed. Schapiro claims that the SEC is overworked, understaffed, and doing the best it can, which may be true. But why raise our expectations beforehand? The agency may be improving, but it still has a ways to go. Former SEC chair Richard Breeden says, “You get zero points in history for what you propose...you get points for what you get over the goal line.”

Schapiro is an old hand at financial regulation, having started out at the Commodity Futures Trading Commission, and after different assignments at the SEC and CFTC, ended up as CEO of FINRA, the Financial Industry Regulatory Authority. For those of you who read your brokerage statements, you should see the acronym “FINRA” somewhere on the statement. FINRA is a private organization which regulates brokerage firms and trading markets. In its own words, it is “the largest independent regulator for all securities firms doing business in the United States”. The unfortunate souls who invested with Bernie Madoff probably did not see the acronym “FINRA” on their monthly statements. So Schapiro was no slouch by the time she came to the SEC.

People who own stock receive those pesky proxy forms and annual meeting notices once a year. Most of the time, this doesn’t mean anything for the little investor, as the average guy on the street does not own nearly as much as either Warren Buffet or a large institution to actually make a difference. But Schapiro wanted to make it easier for shareholders to “wage proxy fights”. However, the U.S. Chamber of Commerce did not share her opinion and almost filed a lawsuit. Somehow this action – on both sides – was delayed until 2010.

Barney Frank, a politician himself, has noticed that Schapiro is under political pressure. He wanted the uptick rule reinstated, somehow this too is in limbo. Hmm… I’d like to see Schapiro get back on her horse and chase after the bad guys. After all, if the rest of us have to follow the rules, why not them? And if anyone can do it, Schapiro has the right background. However, don’t we all know about organizations which have grand plans, then fail to deliver? Wait and see… per my previous post, I wouldn’t bet much on regulation at this point.